1 Information Technology Sourcing: More Than A Decade of Learning Mary C. Lacity Visit to January...

1

Information Technology Sourcing:

More Than A Decade of Learning

Mary C. Lacity

Visit to January 24, 2003

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Presentation OutlineResearch Methods

One-to-one IT Sourcing: Overall lessons

One-to-many Netsourcing The Big Yawn

Business Process Outsourcing: BAE SYSTEMS Case Study

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RESEARCH METHOD:Case Studies

Thirteen year study with multiple coauthors: 90+ case studies, 130 decisions in US, Europe, and Australia

Outsourcing: n= 98 decisionsBritish Aerospace DuPont Inland Revenue Enron GM IRS Rigg’s Bank South Australia Swiss Bank

Insourcing/Backsourcing: n= 18 decisionsContinental Baking Brown Group MEMCOccidental Petroleum Ralston Purina Vista Chemicals Westchester County

Netsourcing: n=10 decisions Corio EDS Host Analytics mySAP Zland

Business Process Outsourcing: n = 4 decisions BAE SYSTEMS Lloyd’s of London

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Dupont

1997 Signed $4 billion in contracts with CSC & Accenture

Outsourced IT infrastructure, applications maintenance, desktops

3100 people transferred

Contracts in 22 countries

Contract is 30,000 lines long, 600 SLA

Decision process took 18 months

Transition period took 2 years

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Multiple stakeholders interviewed at each site...

• Senior executives (CFO, COO, CEO, Treasurer, etc..)

• Chief Information Officers (CIO)

• Contract managers

• Supplier account managers and executives

• Key end-users

• Consultants, internal and external lawyers, union leaders

RESEARCH METHOD:Case Studies

6

CIO-level surveys of Outsourcing experiences:

UK & US (1997, n=101 useable surveys)Scandinavia (1998, n = 40 useable surveys )

CIO-level survey of Netsourcing experiences & plans:28 countries, (2001, n = 274 useable surveys)

RESEARCH METHOD:Surveys

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One to One IT Sourcing

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Case Study Outcomesn = 116 sourcing decisions (one-to-one model)

Outcome Percent of Decisions

Yes, most expectations met 58%

No, most expectations not met

22%

Mixed Results; some major expectations met, other major expectations not met

9%

Too early to determine 11%

9

Year Decision Was Made

YES, most

expectation met

NO, most expectation

not met

MIXED results

Total

1984-1991 14(48.3%)

12(41.4%)

3(10.3%)

29

1992 to 1998 41(73.2%)

8(14.3%)

7(12.5%)

56

TOTAL # OF DECISIONS

55(64.7%)

20(23.5%)

10(11.8%)

85

CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)

Success Rates Over Time

10

Customer Rating of Supplier Performance

One-to-One Outsourcing

4%

2% 2%

5%6%

4%

14%

25%

19%

14%

4%

0 1 2 3 4 5 6 7 8 9 10

Poor Satisfactory Good Excellent

0

5

10

15

20

25

30

Num

ber

of C

ontr

acts

Customer Rating of Vendor Performance113 Contracts Rated

Mean Response = 6.47

Overall, suppliers areearning a “good” reportcard, but there were manyopportunities for improvement.

1997 US & UK data

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52%

37%

15%

41% 42%45%

42%39%

32%

23%

32%

22%

10% 10%

70%

48%

22%

56% 55%53%

50% 49%

41%

34% 34%

24%

15% 15%

Co

st r

edu

ctio

n (

A&

B)

(A)

So

me

cost

red

uct

ion

(B)

Sig

nif

ican

t co

st r

edu

ctio

n

Bet

ter

qu

alit

y se

rvic

e

Acc

ess

to s

carc

e IT

ski

lls

Ref

ocu

s in

-ho

use

IT

sta

ff

Imp

rove

d I

T f

lexi

bil

ity

Imp

rove

d u

se o

f IT

res

ou

rce

Fo

cus

on

co

re b

usi

nes

s

Bet

ter

man

agem

ent

con

tro

l

Imp

rove

d b

usi

nes

s fl

exib

ilit

y

Acc

ess

to n

ew I

T

Bal

ance

d p

roce

ssin

g l

oad

s

Ass

ist

cash

flo

w p

rob

lem

s

0

10

20

30

40

50

60

70

80nu

mbe

r of

res

pond

ents

AnticipatedActual

Anticipated verses actual benefits from IT outsourcingn = 98 US and European respondents

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Proven Practices in IT Sourcing

Selective Sourcing rather than total outsourcing

Joint Senior executive/IT decisions

Internal & External Bids

Short Term Contracts

Fee-for-service contracts

13

Selective Sourcing

Decision: Yes No Mixed Total #

DecisionsTotal

Outsourcing11

(38%)

10

(35%)

8

(27%)

29

Total Insourcing

13

(76%)

4

(24%)

0

(0%)

17

Selective Outsourcing

43

(77%)

11

(20%)

2

(4%)

56

Total # Decisions

67 25 10 102

N = 102 decisions with discernible outcomes

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Managing Sourcing Decisions Through Six Phases

ScopingPhase

MaturePhase

MiddlePhase

TransitionPhase

NegotiationPhase

EvaluationPhase

• Identify core IT capabilities

• Identify IT activities for potential outsourcing

•Measure baselineservices & costs

•Create RFP

•Develop evaluationcriteria

•Invite internal andexternal bids

•Conduct duediligence•Negotiate SLA•Create responsibilitymatrices•Price work units•Terms of employeetransfer•Negotiatemechanism for change

•Distribute contractto users•Interpret contact•Establish post-contractmanagement infra-structures & processes•Consolidation,rationalization, standardization•Validate scope, costs,levels, service levels•Managed additionalservice requests•Foster realistic expectationsof supplier performance•Publicly promote contact•Manage customer/supplier relationships

•Benchmark performance

•Realign the contractto reflect changesin technology &business.

•Recalibrateinvestmentcriteria

•Determineif relationshipis extendedor terminated

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Business and IT Vision

Delivery of IS Service

Design of IT Architecture

Business SystemsThinking

ContractFacilitation

TechnicalArchitecture

ContractMonitoring

VendorDevelopment

TechnicalDoer

RelationshipBuilder IS

Leadership;InformedBuying

Core IT Capabilities

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ScopingPhase

MaturePhase

MiddlePhase

TransitionPhase

NegotiationPhase

EvaluationPhase




•Create RFP









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Strategic Sourcing Decision Framework

Critical

Useful

Commodity Differentiate

Leading

Practices

Lagging

Practices

Sub-Critical Mass

Critical Mass

Stand alone

Highly

Integrated

Requirements Known & Stable

Requirements Uncertain

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ScopingPhase

MaturePhase

MiddlePhase

TransitionPhase

NegotiationPhase

EvaluationPhase




•Create RFP









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Unbridled Demand: Major Source of Cost Creep

Example: Outsourcing Chauffeur Services at British Aerospace

Before outsourcing, demand was constricted by 4 car fleet

After outsourcing, demand is unbridled and supplier hasincreased fleet to 24 cars to meet demand.

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ScopingPhase

MaturePhase

MiddlePhase

TransitionPhase

NegotiationPhase

EvaluationPhase




•Create RFP









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Relationship Management:Often Viewed as Dichotomy

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Relationship Management: A Stakeholder Perspective

ITManagers IT Staff

SeniorManagers

AccountManagers

ITUsers

SeniorBusiness

Managers

IT Staff

Trade UnionSubcontractors

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Quotations From Participants

"A good contract does not ensure a good relationship, but a bad contract does ensure a bad relationship." -- Bob Ridout, Chief Information Officer, DuPont

“This is a commercial business transaction, not a partnership. Suppliers have to keep earning the business everyday.” – Global Alliance Manager, DuPont

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Year Decision Was Made

YES, most

expectation met

NO, most expectation

not met

MIXED results

Total

1984-1991 14(48.3%)

12(41.4%)

3(10.3%)

29

1992 to 1998 41(73.2%)

8(14.3%)

7(12.5%)

56

TOTAL # OF DECISIONS

55(64.7%)

20(23.5%)

10(11.8%)

85

CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)

Success Rates Over Time

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Over Time: Deals are startingto look alike!

Neoclassical Contracts: SLA Penalties for non-performance Variable Pricing Mechanisms for change

Relationship Management: Boot camps Transition Phase Activities Problem Resolution Systems Joint supplier/customer teams in trenches

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Sources of Customer Learning:Institutional Isomorphism

Customer’s own mounting experience: Customer’s Industry ContactsIncremental outsourcingPast outsourcing successes and failures

Customer’s use of external consultants Customer’s outsourcing sourcesTechnology Partners Incorporated ITTUG

($175 billion worth) Outsourcing SummitGartner Group Sourcing Interest GroupMichael Corbett & Associates

Customer’s use of external legal firms Customer’s use of private & publicMillbank & Tweed researchShaw & Pittman Gartner, Yankee, Cutter, IDC

Over 100 books on OutsourcingCustomer’s use of external benchmarkers:

Gartner GroupCompass

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One-to-many Netsourcing

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Netsourcing Business Applications

Netsourcing is the practice of renting or "paying as you use" access to centrally managed business applications, made available to multiple users from a shared facility over the Internet or other networks via browser-enabled devices.

Netsourcing allows customers to receive business applications as a service.

Netsourcing is a delivery channel

Netsourcing is a pricing model

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Wacky World of Alphabet …

Netsourcing

SSP

BSP

CSP VSP

FSP

MSP

ASP

xSP

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The Netsourcing Service Stack

Business Process Delivery

Customized Applications

Standard Applications

Application Operating Infrastructure

Hosting Infrastructure

Network Services

Network Connectivity

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Business Process Outsourcing: Early Lessons,

Future Directions

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Business Process Outsouring

With BPO, the supplier owns and operates the resources, includinginfrastructure, applications, and people, to deliver a businessprocess as a service to customers.

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BPO Survey: Size of Marketn = 120

Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentationAt World Outsourcing Summit, Orlando Florida, 2002.

Size of Market:

Year 2000: $119.4 billionYear 2005: $234.0 billion

US & Europe comprise 84% of market

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BPO Survey: Size of Marketn = 120

Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentationAt World Outsourcing Summit, Orlando Florida, 2002.

1012.4

33.4

21.624.8

13.4

20.623.1

67.6

43.145.8

26.1

0

10

20

30

40

50

60

70

80

Administration Finance & Accounting Human Resources Payment Services Supply Chain Sales, Marketing,Customer Care

US

$ B

illio

ns

2000 2005

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BPO Survey: Top Driversn = 120

Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation

At World Outsourcing Summit, Orlando Florida, 2002.

Scale: 1 = not important to 7 = extremely important

0 1 2 3 4 5 6

Focus on Business

Improve Service

Reduce Costs

Reduce Capital

New Technology

Gain knowledge

Supplement Staff

Align IT/Business

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o Prompted by M&A, fragmented, decentralized HRo Ten Year Contracto $1.1 billion over 10 yearso 700 HR employees transferred to Exulto Exult delivers:

Accounts Payable BenefitsPayroll Regional StaffingHR Call centerHR technology

o Guaranteed cost savings to Banko Bank took equity share in Exult & will share in future profits

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Xchanging Insurance Services (XIS)

Xchanging Claims Services (XCS)

Xchanging Human Resource Services (XHRS)

Xchanging Procurement Services (XPS)

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Transforming Back Office to Front Office:

and Enterprise Partnership for

Human Resource Management

Mary LacityDavid FeenyLeslie Willcocks

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Xchanging Human Resource Services (XHRS)

10 year, £250million deal

Promised benefits to BAE: 15% savings on baseline HR services Service improvement to upper quartile by end of year 5 £20 million investment in technology, facilities & experts, including web-enabled e-hr 50% share in profits from external sales

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Research Method

Face-to-face interviews with 15 people including: HR Director, BAE SYSTEMS Enterprise Relationship Director, BAE SYSTEMS SBU HR Director, BAE SYSTEMS CEO of Xchanging Member, BOD, Xchanging Managing Director, XHRS 3 transferred BAE managers, now:

CFO, XCSHead of Service, XCSHead of Resources, XCS

6 practice directors (Service, Process, Technology, Environment, People, Implementation)

Documentations such as financial reports, practice manuals, performance assessments, annual reports, memos.

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Xchanging provides human resources, procurement, customer administration and accounting services to over 200 customers including BAE Systems, Lloyd's and the London Insurance Market.

Xchanging employs over 1,100 people.

Xchanging takes responsibility for the entire back office, specific functions or a particular business process and transforms them into fit for purpose services. In short, Xchanging cost for profit.

Founded by David Andrews in 1999

About Xchanging

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About BAE SYSTEMS

Prime contractor and systems integrator in the air, land, sea, space, and command and control market sectors.

Defense, commercial, civil markets

World-class capabilities in naval platforms, military aircraft, electronics, systems integration and other technologies.

Eurofighter Astute Destroyer

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About BAE SYSTEMS

BAE SYSTEMS SALES

8546 8611 8929

1218513138

0

2000

4000

6000

8000

10000

12000

14000

1997 1998 1999 2000 2001

YEAR

UK

po

un

ds

in m

illio

ns

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About BAE SYSTEMS

After Tax Profits/ Losses

164

693

328

-19

-128-200

-100

0

100

200

300

400

500

600

700

800

1997 1998 1999 2000 2001

YEAR

UK

po

un

ds

in

mil

lio

ns

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About BAE SYSTEMSStock Price

52 week high: £385.50 on Thursday, April 11, 200252 week low: £158.00 on Wednesday, November 13, 2002Average Price: £194.10 (50-day) 299.37 (200-day)

Interim Financial ResultsReported Sept 12

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About BAE SYSTEMS

January 1999, British Aerospace announced merger withMarconi to create BAE SYSTEMS

Investors promised £275 million in annual cost savings within 3years

"The proposed merger with Marconi Electronic Systems is an important step in the consolidation of the industry in Europe and creates a strong and highly capable business with significant cost benefits." -- Sir Richard Evans, Chairman of the Board, BAE SYSTEMS

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BAE SYSTEMS’ HR

In 1999, Terry Morgan, Group HR Director charged with delivering 15% to 40% cost savings on annual HR spend of £25 million

Group HR was small, focusing on senior pay & benefits, seniorlevel development, organizational design

700 HR professionals in SBUs at 70 sites doing transactional activities such as payroll, benefits, recruiting, training, HR procurement

Shared Services as solution to cost reduction…

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SBUManagingDirector

SBUManagingDirector

SBUManagingDirector

SBUManagingDirector

SBU HRDirector

SBU HRDirector

SBU HRDirector

SBU HRDirector

TransactionalActivity/

ProfessionalServices

Transactional/Professional

GroupHR

Head Office

SBUManagingDirector

SBU HRDirector

SBUManagingDirector

SBUManagingDirector

SBUManagingDirector

SBUManagingDirector

SBU HRDirector

SBU HRDirector

SBU HRDirector

SBU HRDirector

GroupHR

Head Office

SBUManagingDirector

SBU HRDirector

FROM DECENTRALIZED:

TO SHAREDSERVICES:

TransactionalActivity/

ProfessionalServices




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Four Options forImplementing Shared Services

1. Do It Yourself

2. Management Consultancy

3. Fee-for-service outsourcing

4. Enterprise Partnership

Early 2000

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Enterprise PartnershipDavid Andrews proposed that BAE SYSTEMS and Xchanging should form a fifty-fifty jointly-owned enterprise.

The enterprise would be operated as a strategic business unit within Xchanging, giving Xchanging the responsibility and accountability for implementation and subsequent operations.

But both BAE SYSTEMS and Xchanging would sit on the Joint Board of Directors to ensure continued customer involvement and oversight.

The enterprise would initially behave as a traditional outsourcer by transferring BAE SYSTEMS HR assets and personnel to the enterprise governed by a ten-year contract.

The enterprise, in turn, would implement the shared services concept and deliver HR services back to BAE SYSTEMS.

But in the long run, the enterprise would further leverage the HR assets and personnel to attract external HR customers, of which profits would be shared 50/50 with BAE SYSTEMS.

Spring 2000

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Enterprise Partnership

"We soon came up with a story--and Terry really pushed this with his colleagues--about what the real risk is: 'I have got the same people tomorrow doing the job they are doing today. In addition to that, I have got all these new resources with different skill sets that are coming to help these people do it better than they did it before and I have got twenty five million dollars over a five year period to invest in technology that I have not got today. It is guaranteed, it is part of this contract. So it is the same people doing the same job. In addition to all these other resources that are going to help make it move, with some incentives to make it happen that we haven’t got today, what is the risk because if it all goes wrong and these are bad managers, then we just TUPE transfer everybody back and we take it back again, so what is the real risk?'" -- Alan Bailey, XHRS

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Enterprise Partnership?

Because, against their normal practice, BAE SYSTEMS did not do a formal request for proposal, the HR team wanted to step back and invite Xchanging and another supplier to compete.

At this stage in April 2000, Xchanging's team was devastated:. "When we told Xchanging that we were going to do a beauty parade with Xchanging and another BPO supplier, I have to say I have never seen David Andrews so shell-shocked." -- Chris Dickson, Relationship Director, BAE SYSTEMS

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Enterprise Partnership?

Would accept BAE transfers -- Use Exult’s existing staff

Complete attention to BAE -- Just signed other megadeals

Take service as-is -- BAE to clean up mess first

May 2000

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Letter of Intent June 2000

"When I told the CEO of the alternative bidder that they hadn't been chosen, he did say to me, 'okay, but I would like to thank you for the fairness of the way the parade went... it was actually a very thorough process, we had been given a fair crack of the whip.'"-- Chris Dickson, Relationship Director, BAE SYSTEMS

Goal was to sign a contract by September 2000, but…

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BAE/Xchanging NegotiationsJune 2000 – February 2001

Scope Reduction: Eliminate North America Only 462 UK people to transfer rather than 560

"It is my perspective and obviously it is not perfect information but certainly I had a very, very strong view that there were some people in BAE SYSTEMS that had decided to de-scope the deal; who never really knew what the scope was but decided what scope they would find politically acceptable and that was it, that was the deal they wanted" - David Bauernfeind, CFO "So we ended up drawing a line in slightly the wrong place, in my view, so we still had some people in BAE SYSTEMS’ retained HR who were never going to play the strategic role as designed." – Steve Hodgson, Head of Resources,XHRS

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50%/50% Joint Ownership

50%/50% split in cost savings, estimated baseline £25m/year:

YEAR 2001 2002 2003 2004 2005Percent 10% 15% 15% 15% 15% Delivered as a rebate, if £25million costs transferred, Xchanging would only charge £22.5million

50%/50% split on new revenue generation from external sales

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Services: As-is measured within 6 months By year 5, improvement to upper quartile

Governance:Joint Board of Directors: CEO of Xchanging and Group HR Head BAE

3 Xchanging execs & 2 BAEs non-execs Purpose: Protect the Rights of Shareholders

Service Review Board: 3 members from BAE, 3 members from Xchanging Service specifications, price approval Purpose: Service performance monitoring

Technology Review Board: Joint board to ensure £20 million investment

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D avid O ldf ie ldH R B u s in ess P artner

J im M eechanH ead of R esou rc ing

Joan ne C arrH ead of G radu ate R ecru itm en t

& D evelopm en t

S arah K enn yH ead of R em u neration

& B enef its

H ow ard M cC allumH ead of Train ing

C hris C ableH ead of In ternational A ss ignm en ts

N eil W atk in sonH ead of E m ployee D evelopm en t

& H ead of P rocess

M ark H oggartR em & B en S trategy

S teve H odgsonH ead of R esou rces

T ina Jam esH ead of P ens ion s

S teve D ru ryIT D evelopm en t M an ager

A nn TaylorC ustom er S upport

Team M an ager

R ich ard B eckettF ac ilities M an ager

togeth r

T im H ollan dH R IT O peration s

M an ager

A ndrew P etrieP rojec t M anager

togeth r S ervice C en tre& H ead of In fo S ervices

M ike M argettsH ead of Im plem en tation

P h il B u tlerF inan c ial C on troller

D avid B auern feindC F O

S am S parkesC ustom er R elationsh ip M anager

A vion ics

S im on M ilnerC ustom er R elationsh ip M anager

O perations & A irc raf t S ervices

R u th C ravenC ustom er R elationsh ip M anager

H O

R ach el Ton ucc iC ustom er R elationsh ip M anager

C S & S

L uc inda H ew itsonC ustom er R elationsh ip M anager

P rogram m es

B ryony M ooreH ead of S ervice

A lan B aileyN ew B u sin ess D evelopm en t

R ich ard H ou gh tonC E O

Contract in Effect in May 2001

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Xchanging’s management believes that the capabilities requiredto transform a back office to a front office requires 7 genericbusiness competencies rather than domain specific knowledge…

How Did Xchanging Complete the Transformation?

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OperationalCritical activity Preparation

Service

Set-Up

Process

People

Technology

Sourcing

Environment

Preparation Realignment Streamlining Continuous Improvement

2-3mths 3-6mths 6-9mths

Transformation is Implemented in Four Phases

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People Competency

People Competency builds champion teams from transferred employees by unlocking their talent and energy, primarily through extensive training programs and direct contact with Xchanging’s senior management:

-- Induction Programs to 430 transfers within 6 weeks

-- Management training

-- New job descriptions

-- New Customer-focused culture

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Preparation Re-alignment Streamlining ContinuousImprovement

MourningForming

StormingNorming

Performing

•Mechanisms•Deliverables•Measures•Benchmarks•Gate




People Competency

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People Competency

On business as usual in short-term:

"Richard Houghton was saying, it’s business as usual today guys because we don’t want to upset the service. We are not going to go around now to BAE and say, 'I’m not doing that for you any more Mr. Customer because it’s not in the service definition yet.' We have a philosophy that says if he wants you to do something, you just do it. If there is a commercial consequence of that we will worry about it later and talk to your Line Manager but it is a yes to the customer, not a no." -- Alan Bailey, XHRS

64

People Competency

On business not as usual in long-term:

"We started up by saying 'these are the cost reduction commitments', I said 'we’d have to double productivity in five years', I said 'in so far as we can off-set that through third party revenues by effectively using spare capacity to deliver services to third parties we will, but that’s what we are going to do'. " -- Richard Houghton, CEO, XHRS

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People Competency

On training results:

"The transferred employees had seen Xchanging's management team, because we all went to these things, did Q & As, stood on the stage and answered all their questions, Richard Houghton did all of them, he was committed to doing these. The employees hadn’t seen that before. They had been in an area where they didn’t see the management very often, didn’t get access to them and then all of a sudden, this is an enthusiastic team that they are now seeing and they were part of it, they went back buzzing." -- Alan Bailey, XHRS

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Service Competency

Define the as-is service, measures service, and agrees to service targets through a disciplined methodology called Service1st

The goal is to provide the same levels of service during transition then move to customer-negotiated service levels based on individual customer needs.

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Service Specification& Reports

Service Objective

Customer Type Service Class

Customer Service Item

Customer Service

Metrics e.g.• accuracy

• cycle time• frequency

• quality• volume

& Standards

Service Competency

68

Service Competency

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Service Competency

XCS Service Team:

As-Is Service: 400 service levels drafted Service Review Board approved in October 2001

But an extra £80 million a year in indirect procurement spendWas uncovered for fleet, contract labor, recruiting, stationary,And travel! HR was buying services from over 200 suppliers,All in decentralized budgets.

70

Xchanging Procurement Services (XPS)

Separate Enterprise Partnership signed November 2001

Worth £800 million over 10 years

Sourcing Competency

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Sourcing Competency

Car FleetsNon-technical contract laborLearning & DevelopmentHealth CareRecruitmentRenumeration & BenefitsStationary

£80 million

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Category Expertise

Sourcing Tools

Spend Aggregation

Sourcing Competency

73

Sourcing Competency

Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging.1

Baselining + Gainshare

Spend‘Unitisation’ of

category

BaselinePriceper unit

Gainshare Delta

Baseline price

New Buying price

Core

CEO oOn average, 12% savings delivered on categories transferred

o Margins range from 5% to 45% depending on category

74

Example of ‘Un-bundling’

Profit

Costs OfCosts Of

Car LeasingCar Leasing

Insurance

Car Purchase

Maintenance Costs

ResidualValue / Depreciation

Fuel Costs

Tax

VAT, Road

Accident Management

Breakdown/Roadside Recovery

Profit

Costs OfCosts Of


Insurance

Car Purchase

Maintenance Costs


Fuel Costs

Tax

VAT, Road

Accident Management


Costs OfCosts Of


Insurance

Car Purchase

Maintenance Costs


Fuel Costs

Tax

VAT, Road

Accident Management

Breakdown/Roadside RecoveryInsurance

Car Purchase

Maintenance Costs


Fuel Costs

Tax

VAT, Road

Accident Management


Key Cost Elements of Car Leasing

75

Environment Competency

Goal: create modern and well-branded physical spaces to build a visible front office for customers.

Physical spaces also foster a front office mentality

Xchanging built, bought furniture, and decorated new facilityBy February 2002

Occupancy held up by IT contract with CSC

76

Preston


77

Preston Ready!


78

Preston Ready!

79


"Space has a big impact on people's morale and the perception of their value-- Mike Margetts, Implementation Practice Director, Xchanging

80

Process CompetencyGoal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvementdiscipline.

DPMO

6 3.4 99.99966%

5 233 99.9770%

3 66,807 93.3%

ProcessCapability

Defects Per Million YieldOpportunities

%

4 6,210 99.37%

2 308,000 69.2%

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Process Competency

Process Head &Master Black Belt: Mentors

Black Belts: Full Time

Green Belts: Part-time

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Process Competency

Redesigning Processes such as Senior Leader Peer Review

Old process: 640 senior leaders did paper-based peer reviews, assisted face-to-face by HR personnel

New process: e-hr online peer review

"What would have happened before, thirty people would have happily expanded a task to fill three months and as it is now, eight people have been busy for a month--bang! Done." -- Mike Margetts, Head of Implementation, Xchanging HR Services

83

Technology Competency

Goal: Build and implement enabling technology on componentdriven architecture.

Goal: Build and implement e-HR within 6 months

Went on a recruiting rampage on May 1, 2001

Hired 19 full time technology managers, architects & specialists

PeoplePortal went live on October 4, 2001

84

Reference Performance

People Relationship

Portal

ContactManagement

HRKnowledge andContent Mgmt.

ServiceManagement

eForms

CCI

PerformanceControl

Core Enterprise HRIS

ESS/MSS

Core DW(Time Rel)

Data and Process Integration

CTRXchanging Self Service

e-HR Application Framework

http://www.sap.com/index.asp

http://www.reuters.com/home.jhtml;$sessionid$S1YNRGYAADBWCCRBADLCFEYKEEANOIV2

http://www.hire.com/index.php

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"I think they were absolutely astonished that we delivered on that, I don't think they expected it for one minute." -- Richard Houghton, CEO, Xchanging HR Services

"I think the peopleportal has been the first sign from within the business that something has changed, something has actually happened. I think the first time it was used, it was used for the senior leadership population, we were doing an exercise on pay review so each senior leader within the business (650) of them had access to that peopleportal. We had a lot of very good feedback, it was very good, the technology was great, it was web based, we’ve had some very good feedback but we’ve also had people who just can’t get the hang of using the technology." -- Kim Reid, HR Director, BAE SYSTEMS

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"I think technology is an expensive resource, so you’ve got to be careful with technology, as you know you can spend a lot of money and not get a lot of value. So I think technology from our perspective is very much used when it’s needed. Just because we have a service delivery platform doesn’t necessarily mean that every service we deliver has to be over the Internet, if it doesn’t make sense, we shouldn’t do it. So technology is a bit of a follower in this case, it definitely follows service, service is always first and it's rarely that we would be in there before process because I don’t want to put technology on top of a broken process." -- Steve Bowen, Technology Practice Director, Xchanging

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Implementation Competency

Goal: to orchestrate the timing and resources required for theOther six competencies.

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No Set Formula:

"I don't want to tell you the perfect process for implementation project management, I actually want to say that I am prepared to do anything I need to to get things done....basically it is an anti-approach. Methods are not really important--the end result is everything." -- Mike Margetts, seconded from his role as Practice Director of Xchanging’s Implementation competency.

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Implementation CompetencyPreparation Realignment Streamlining Continuous

ImprovementJune 2000 to May 2001

May 2001 to October 2001

November 2001 toDecember 2002

December 2002To May 2011

Data collected on BAE finances & peopleService objective & preliminary service definition Structure & people plansCost modeling Financial reporting & control plans Technology architecture designedConstantcommunication with targeted transfers

430 BAE staff are transferred & re-oriented, & retrained Detailed "as is" service specification defined & approved Black belts trained and working on first set process improvements; recruiting process redesigned & implemented PeoplePortal launched

New Organizational design

Shared Services established

Preston Service Regional Teams established

Downsized staff

3 more versions of Peopleportal

Process Improvements to more HR services

Future challenges: Attract external customers to increase revenues

Sustain cost cuts and service improvements

Upper quartile performance in all HR service areas

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Findings as of 2002

Prior to the Xchanging partnership, HR at BAE SYSTEMS:

(a) lack of investment, (b) lack of leadership, (c) lack of employee motivation, (d) lack of customer-focused service, (e) bureaucratic and inefficient processes, and (f) outdated and non-integrated technology.

Preliminary findings assess the effectiveness of using an enterprise partnership as a vehicle for transforming this low functioning back office into a commercial enterprise.

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Findings

Finding 1: The Enterprise Partnership Model creates a clash of cultures, but cultural incompatibility may be just what you need.

"What was obvious to me, the Xchanging people were part of a small company desperate to succeed, and that desire to succeed just didn't exist in the BAE SYSTEMS HR culture." -- David Bauernfeind, CFO

If you left work at half past six, you were having a late night at BAE. I mean, that is the BAE culture. I was in at ten to seven this morning and I'll be here at nine o'clock tonight and that is the Xchanging culture. The Xchanging guys I just could associate with very, very, very easily. From day one I felt much, much more comfortable. The hard thing was it was a damned sight harder work, much more disciplined environment, much more focused environment. It still took me a little while to make that leap – probably two or three months."

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Findings

Finding 2: The Enterprise Partnership Model offers multiple short-term implementation phases that yield faster results and pose less risk than a single, large-scale project.

"Innovation doesn't need to be a big idea, it can be lots of little things...What we like doing is introducing a bit of change every three months because it has much more immediate impact rather than building a great big filthy system." -- David Andrews, CEO Xchanging "If you don’t do it within three to six months then you don’t do it." -- Mike Margetts, Implementation Director, Xchanging

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Findings

Finding 3: The Enterprise Partnership Model views technology not as a solution, but rather as an enabler.

"People are altogether more flexible and creative and clever to fit around a system." -- Mike Margetts, Implementation Director, Xchanging

"I wanted to see what happened if you improved business processes and services without touching IT. That was just a quirk of mine which was a very lucky break because in fact what we found was that we could engineer a huge improvement and do it on the back of the old legacy system." -- David Andrews, CEO, Xchanging.

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Findings

Finding 4: When employing Fee-for-Service Outsourcing or an Enterprise Partnership Model, be sure to manage user demand.

"We are seeing some evidence of increased demand with Xchanging HR Services. It's the early days yet, but demand for service before XHRS was always restricted because as an HR Director, you only have the number of people that you could get your MD to agree to, so that effectively capped it. Of course, we have taken that away now and people can demand ever more and more." -- Steve Hodgson, Head of Resources, XHRS.

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Findings

Finding 5: Both Fee-for-Service Outsourcing and The Enterprise Partnership Model uncover spend previously hidden in decentralized budgets.

"The cost has increased quite substantially. We’re just having a review on that at the moment. At the moment that communication isn’t clear and it does look as if costs are going up. But in reality, we’re doing a review of it and we’re doing some investigation on it, in reality it probably isn’t going up because of Xchanging. It just means that we need to probably transfer budget over that hasn’t traditionally sat within the HR team, so that it's all as one and recharged against that, that total mass, rather than part left within the business. But it is a concern." -- Kim Reid, HR Director, BAE SYSTEMS

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Findings

Finding 6: The Enterprise Partnership Model delays due diligence until after the contract is in effect, which speeds the negotiation process and more fairly distributes the burden of newly discovered costs.

"The quality of the data about the HR function in terms of not just what salaries people were on but just who was there, how many to within 10%. Really, really surprising and if anything that experience, if I ever needed drilling home about why BAE needed to do the deal, that did it. If you can’t tell how many people are in your own function within 10% to 20% what chance have you got of providing value added HR for a business? It was just shocking." -- David Bauernfeind, CFO, XHRS

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Findings

Finding 7: The Enterprise Partnership Model aligns incentives better than fee-for-service outsourcing.

"So if it was a traditional customer/supplier relationship, I think it would be very much customer/supplier which perhaps may not be totally joined up in the middle. You would get the instance that the customer would blame the supplier for not delivering a service. For me, the partnership means that the accountability for delivering the service into the business is mine. I have to make sure that it delivers a seamless service so that myself and my other HR directors in this business will not say ‘the reason this went wrong was because Xchanging did this’. If something goes wrong it’s because we did it. It’s very much a partner type relationship." -- Kim Reid, HR Director, BAE SYSTEMS

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Findings

Finding 8: The Enterprise Partnership Model does not perfectly align incentives.

In the past, the joint governance between customers and suppliers we studied led to a managerial schizophrenia. Because the enterprise's primary customer is also an owner, the customer has two competing goals: to maximize cost-efficient service delivery from the enterprise and to maximize the revenue of the enterprise. How can the customer do both? Furthermore, if the same executives sit on the Board of Directors of the customer company and the enterprise company, which hat should they wear? Should they be pushing for more services at a reduced cost, thereby squeezing as much as they can from the enterprise? Or should they push for generating more revenues, which distract the enterprise from their needs?

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Findings

Finding 9: The Enterprise Partnership Model benefits from generic business competencies rather than domain-specific knowledge.

"I always say the best HR people are people who haven’t been in the HR function all their lives. You need a different view. So the Xchanging team, although they are not HR professionals, it works probably better that they are not because if they go in understanding all the pitfalls that there may be, then they’ll never make any changes, so sometimes it is better." -- Kim Reid, HR Director, BAE SYSTEMS

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Findings

Finding 10: The Economics of the Enterprise Partnership Model need to Work for the Client and Supplier Without Over-Reliance on Third Party Revenues.

"The business development in year one at this stage was almost zero because the focus was let’s get our act together in delivering this to BAE SYSTEMS first before we all turn salesmen and go out and start selling ourselves. It is always a hard decision to make because our future relies on getting third party business in but at the time it was a management team in XHRS and an agreement at the Xchanging group level that we would concentrate on delivering the operation, getting our act together to get our product out, get our people to pull together to get the service center in place. And it was probably only the beginning of quarter four last year that now started to be a bit more active in the market rather just being passive." -- Alan Bailey, New Business Development, XHRS

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Findings

"The reality if I just look at it in XHRS is we have to really work hard not to make this business work. It is pretty easy to make this business make money, the hard bit is the time scale and the growth. So you concentrate resource and you put their management in place, you remove the weak people over time and you put in good technology. You really have to work to not make that add up to a significantly better position than you were in before." -- David Bauernfeind, CFO, XHRS

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Can Success be Replicated?Ideal Customer Profile

The customer has a large back office spend of at least £25 million per year and at least 500 employees, making the deal large enough to attract a competent external supplier The customer's back office operations are highly decentralized, allowing the opportunity for significant savings from centralization and standardization The customer's back office operations have not received high management attention historically, allowing the opportunity for significant savings and service improvement from better management The customer's organization would resist centralizing and standardizing themselves due to internal political resistance, unwillingness of senior management to make the required upfront investment, or lack of skills and experience of back office staff to make the transformation.

1 Information Technology Sourcing: More Than A Decade of Learning Mary C. Lacity Visit to January...

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